How to Find Crypto-Currency Winners: Knowledge is Key
29 April 2021, Co-authors: Patrick Poirier, Mike Sites, & Michel Laporte
Becoming Buffett
In 1956 Warren Buffett founded, Buffett Partnership Ltd, which would eventually become the well-known, Berkshire Hathaway. And Buffett, would go on to be the Oracle or Sage of Omaha, becoming arguably the world’s greatest stock investor of all time.
How did he do it? By his own admission, it was because of his adherence to the principals espoused and developed by Benjaman Graham, a method known as value investing. In other words, Buffett’s primary tool in achieving his success and wealth, has been in identifying undervalued companies and stocks.
Why This Matters to You?
What if you could be the ‘Warren Buffett’ of the crypto world, with the right information at your fingertips to find these diamonds in the rough, the undervalued and discounted cryptocurrencies? What if you could sift the losers from the winners?
The Inside Track on Cryptos
Similar to Warren Buffett and Benjamin Graham, we’ve done the research. Except we’ve researched on thousands of crypto tokens. Through a series of articles, starting with this, we will be sharing with you the inside track of our discoveries, our analysis so you, too can hold the keys to value investing for potentially big and reliable wins in the crypto currencies.
A Key Indicator: Wallet Count
Wallet Count Matters
Like any one of us, crypto-traders are always on the look-out for new investment opportunities. Yet it is next to impossible to predict market movements without correct and reliable indicators to guide and identify your buy, sell and hold signals.
One such vital indicator that we believe may serve as a powerful predictor in finding the winners, is wallet count. Essentially how many wallets or holders possess a given token.
For example, Bitcoin, with a market capitalization of $1T USD is held by approximately 40M unique wallets. Additionally, Ethereum, the 2nd largest crypto-capitalisation of $300B is held by roughly 55M wallets.
Show Me the Money or Wallets: A Compelling Theory
We analyzed thousands of tokens and computed a linear regression to approximate an average market cap given the wallet count. In theory this would enable us to identify undervalued and overvalued crypto-assets.
Caution: Outliers Ahead
The linear regression is a work in progress, since it appears to have many outliers in the data. These outliers can in part, be attributed to some blockchain explorers handling wallet information differently.
Some tokens were released with massive wallet counts through airdrops, but with very low buying volume, that create artificial market caps into the billions. This value should be taken with a grain of salt. Again, other token projects have a high number of unique wallets, but with very little value per wallet, which also may imply manufactured or fake wallets to spurn buying activity.
For example, when we look at Figure 2 below, we can see outliers having a lower wallet count coupled with a high market share. We can infer that most of this value is held within a few wallets. Essentially a few whales or investors with deep pockets owning most of the value, which is a great risk if they start selling in mass (dumping).
On the other hand, there is a substantial number of assets that share a high active wallet count compared to the respective and current market capitalization.
Note: It is worth noting that a few coins and tokens were left out from this graph because of the lack of available information regarding wallet addresses.
A similar story is shown if we look at smaller tokens deployed within a single blockchain network, for example the Ethereum network as shown below.
It is possible that older projects tend to have higher market caps per wallet count. Reasons being some of the holders have held onto the tokens because:
1. They lost their access
2. They are not ready to cash in their gains
New projects may simply not have had the chance to diversify their community, even though some of them can boast high market capitalization.
An Example of Application: Ethereum
Bullish on Ethereum
No reasons to read the tea leaves, based on this linear regression data, we could make a case that Ethereum is currently undervalued. Regardless of many opinions on Ethereum’s slower price appreciation from last year compared to Bitcoin, the wallet count compared to market cap indicates an undervalued Ethereum.
With simple linear models, we can state that both ETH and BTC are currently over-valued, however assuming BTC is the true standard of comparison, given the potentially large number of outliers, let’s then compare only ETH to BTC regarding market cap per wallet count. This would imply that ETH is undervalued and could soar up to 3X. This is possible given ETH2.0 on the horizon for the summer which could fix the currently high transactional fees (gas fees) that have significantly slowed down its potential.
Alternatively, in accordance with our model — Dogecoin would be undervalued. However, we know for a fact this has been momentarily untrue. Dogecoin was created as a joke, or so-called Meme, and somehow based on an Elon Musk tweet, it became a highly sought-after currency, similar to Gamestop. In both cases, the market was misled into buying based on emotions, fear of missing out, and simply put plain ignorance. We can expect both Gamestop and Dogecoin to eventually suffer massive losses as the market runs out of steam and corrects to what these tokens truly represent.
A Rough Stone Rolling
While these models may be interesting, they are far from presenting the whole story. More datapoints would be required to make even more robust predictions, and accurate results.
At the moment, plotting active wallet counts show a large density of assets with similar profiles, and outliers that accumulate either a large number of addresses or market shares. If we let these markets follow due course and mature, we will ultimately have prices and users that are closer to a fair representation of value.
In reality, a more robust model would have to take into account future growth of wallet counts as well, which would have to rely on other data sources, i.e., the velocity of wallet count growth.
Overall, we are committed to keep sharing our research and findings as we bridge the gap for the layman to explore the crypto world.
Don’t Miss Out
In the next two articles in this series, we will share our findings on the top 10 undervalued cryptos followed by the top 10 overvalued cryptos to avoid.
If you liked this article, you may enjoy, Best Practices of Crypto-Assets Portfolio Diversification, Cash Flow management for SMB using Cryptium: a high-yield, low volatility crypto-annuity, and Axion: We Should Have Invested More.
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As always, please exercise due diligence and caution whilst investing in crypto-assets. We would urge you to take professional investment, financial, taxation and/or legal opinion on the same.
Data source: CoinGecko for market data and a number of blockchain explorers such as Etherscan and Tokenview.
